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Why the Bakken Boomed

Why the Bakken Boomed thumbnail

A Williston Basin Primer

In my previous article Addressing the World’s Flare Gas Problem, I discussed my current project, which recently took me to the Williston Basin in North Dakota and Montana. Today, I will discuss the region’s shale oil boom in greater detail. In Part 3 of this series, I will conclude by delving into the economics of shale oil production.

The Williston Basin underlies parts of North and South Dakota, Montana, southern Saskatchewan, and southwestern Manitoba. Within the Williston Basin is the Bakken Formation, which first produced oil over 60 years ago. It was on North Dakota farmer Henry Bakken’s farm in 1953 that Amerada Petroleum — later acquired by Hess (NYSE: HES) — discovered oil at a depth of about 10,000 feet. The Bakken Formation is to date the source of most of North Dakota’s rapid oil production growth, but underneath the Bakken Formation is the Three Forks Formation, which has also begun to produce oil:

Bakken-MapSource: US Geological Survey

*AU = Assessment Unit and TPS = Total Petroleum System

There are billions of barrels of oil in the Bakken Formation, but the crude is trapped inside a fine-grained rock called shale. This shale has high porosity, which means it has lots of tiny spaces that hold the oil and gas. But the permeability of the rock is very low. In other words, the rock holds a lot of oil, but it doesn’t flow out readily. Thus, 50 years after the discovery of oil in the Bakken, North Dakota was still a minor producer at less than 100,000 barrels per day.

That would change dramatically with the marriage of two technologies — which only became economical when oil prices began to escalate in 2005.

The Two Game Changers

The technique of hydraulic fracturing, or “fracking” had been around since the late 1940s and has been used extensively to promote higher production rates from oil and gas wells across traditional production regions like Texas and Oklahoma. Fracking involves pumping water, chemicals and a proppant down an oil or gas well under high pressure to break open channels (fractures) in the reservoir rock trapping the deposit. The proppant is a granular material like sand designed to hold those channels open, allowing the oil (or natural gas) to flow to the well bore.

Hydraulic fracturing rectified the permeability issue of shale. But there were wells being fracked in North Dakota in the 1950s. Why did it take another 50+ years before oil production took off in the state?

There are expenses involved in fracking a well, so the increase in oil production has to make the extra expense worthwhile. But the Bakken is only 100-150 feet thick. You might imagine that if it were thousands of feet thick you could frack many times at widely-spaced vertical intervals. However, that wouldn’t work in a formation that is under 150 feet thick. If the fractures are too close together you get diminishing returns. You don’t want the fractures from one stage to overlap another stage. So, a vertical well in the Bakken might only support a single frac stage, which would increase oil production but not dramatically so.

Like fracking, horizontal drilling was invented decades ago, and has been widely used in the oil and gas industry since the 1980s. As its name implies, horizontal drilling involves drilling down to an oil or gas deposit and then turning the drill horizontal to the formation to access more of the deposit. These horizontal “laterals” can be 5,000 to 10,000 feet in length. So now instead of a well being able to access maybe 130 feet of the Bakken Shale, a single well could access more than 50 times this distance. It was the combination of these two decades-old techniques — hydraulic fracturing and horizontal drilling — that inaugurated the U.S. shale boom.

151019TESbakkenlayers
Source: American Oil & Gas Historical Society

North Dakota’s oil production began to take off in 2008, with natural gas production not far behind. Today North Dakota is the 2nd largest oil producer in the U.S., behind only Texas:

151019TESndprod

Getting to Market

Logistically, it was a challenge to get this new oil and gas to market, since North Dakota wasn’t a major traditional oil producer. Because pipelines take years to construct, the early surge of production proved a boon to railroads. The rails already criss-crossed the area, and ramping up was simply a matter of adding the right kind of rail cars and loading terminals. In less than three years railroads including Berkshire Hathaway’s (NYSE: BRK-A) BNSF Railway increased crude shipments by over 700,000 bpd.

This year, however, the volume of oil being moved by rail has fallen by about 200,000 bpd. Some of this can be explained by flattening oil production as a result of the price crash, but the other major factor is that pipeline infrastructure is finally beginning to catch up. (Of course natural gas isn’t suitable for shipping in a rail car, so much of the associated gas production was flared as discussed in my previous article.)

151006MLPIIndrail
Source: North Dakota Pipeline Authority

Resources and Reserves

So how much oil are we really talking about? In 2013 the US Geological Survey (USGS) estimated that the Three Forks Formation contains an estimated mean resource of 3.73 billion barrels of oil and the Bakken contains another 3.65 billion barrels of oil for a total estimated resource of 7.4 billion barrels of undiscovered, technically recoverable oil in the two formations. The two formations were also estimated to contain a mean of 6.7 trillion cubic feet (tcf) of undiscovered, technically recoverable natural gas and 0.53 billion barrels of undiscovered, technically recoverable natural gas liquids (NGLs).

Of course “technically recoverable” is an estimate of what could be recovered with existing technology, and therefore vastly underestimates the amount of oil in place in the Williston Basin. Most of this oil isn’t recoverable with existing technology, but the total oil in place has been estimated to be as high as 500 billion barrels. The state of North Dakota estimated a more modest 167 billion barrels of oil in place, which is still far more than the amount that is technically recoverable.

But what is “technically recoverable” isn’t necessarily economically recoverable. To be classified as a proved reserve, oil or gas has to meet both qualifications at prevailing prices. In a December 2014 report, and based on oil prices still hovering around triple digits, the Energy Information Administration estimated that the proved oil reserves in the Williston Basin were 3.2 billion barrels. To put this in perspective, this is equal to just under 6 months of U.S. annual oil consumption which is presently about 7 billion barrels of oil per year.

What about Economics?

I started to include a section here on shale oil economics, but ultimately decided that this topic can stand alone in next article. There is a school of thought that shale oil isn’t economical, because the wells deplete too quickly. The truth is a lot more nuanced than this. I will get into this in the next article, and rank the region’s top producers.

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5 Comments on "Why the Bakken Boomed"

  1. shortonoil on Fri, 23rd Oct 2015 7:07 pm 

    A successful business is one that can pay back with interest the debt it has accumulated, cover its operating costs from cash flow, and return a reasonable dividend to investors. The shale industry has invested over 1 $trillion dollars in its operations, and is producing $360 billion a year in gross sales. If it could return a 10% profit margin on its gross sales it would take 28 years, not counting interest, to return the principal. On a well that becomes essentially a stripper in five years that can not happen.

    This constant talk of the shale business is an oxymoron!

  2. Mark Bucol on Fri, 23rd Oct 2015 9:01 pm 

    Shale formations that require fracturing and horizontal drilling are the most expensive oil reservoirs to produce, next to deep waters ones. Since the shale drilling companies are having a hard time borrowing money, the smaller drillers are turning to selling shares in their wells instead of going to the banks for loans.

    I have spoken with promoters of several shale oil projects wanting me to invest. Most are placing their bets on a quick return to oil prices above $60 hoping for $70 oil. Conventional oil can still make money at $50 per barrel, giving the investor about 15% to 20% return after figuring in the tax breaks (about 1/5 of the benefit). Shale oil gives almost no return at $50 per barrel oil based on the stats I have looked at. I have several investments in oil, so I am speaking from experience.

    Shale oil drilling will increase only if oil can get close to $70 per barrel. Until then drilling in the Bakken will continue largely in the most productive areas, which will be completely “drilled over” in the next three to five years. After that the Bakken production will fall back to a small fraction of what it is today as many other “uneconomical” areas remain undrilled. Only if oil goes to over $100 per barrel will the frenzied Bakken oil drilling of the past five years resume and production increase, but likely not.

  3. shortonoil on Sat, 24th Oct 2015 7:06 am 

    “Conventional oil can still make money at $50 per barrel, giving the investor about 15% to 20% return after figuring in the tax breaks (about 1/5 of the benefit).”

    If conventional oil can make money at $50 per barrel, that means that when oil was $100/ per barrel it was making at least a 50% profit margin on its gross sales. It didn’t, and never has! By cutting out a few expenses the industry can continue to pump until their fields go dry. At $50 per barrel the industry can no longer replace the reserves they are extracting. $50/ barrel oil places the life time for most of the petroleum industry at 6 to 7 years when the average water cut reaches 90%.

    It the industry is not replacing reserves, it is going out of business!

    http://www.thehillsgroup.org/

  4. Davy on Sat, 24th Oct 2015 8:36 am 

    It is a simple point like the point short just made that changes the dynamics of the mentality of so many people today. They just don’t understand how that business works. They can be easily be manipulated into thinking all is well. Folks this short quote “petroleum industry at 6 to 7 years when the average water cut reaches 90%.” by short is profound.

    Of course the oil industry is so large and that some areas will be on the high side of the average. The inconvenient truth is the global system has a minimum operating level of growth and oil supply so the average is what counts per the global economy. All locals are globally dependent. This oil and economy relationship is compressing each month that goes by. We now see many unnatural and economically destructive outcomes from this instability. Expect this to get worse.

    At some point this compression will be catastrophic because supply shortages will set in and or financial collapse from economic activity too low to support the growth meme. Personally I feel we are in the cannibalization phase currently with growth being a pseudo or painted growth. The real level is negative when you consider future claims of growth through EPS for example are a fairy tale. Our 401K’s and government responsibilities are in reality unfunded. Even the value of our currency is just a few years away from being very much different. All currencies are really in this boat because all currencies have value in relation to a global basket of currencies functioning together in global trade. We have significant amounts of debt that is really bad debt because of the above. Significant amount of excess capacity that is bad debt. Deflation is decay not growth.

    It is easy to read this and drift on to another issue. This morning the lights went on and so did my laptop. When and if the wife goes to town the store shelves will have food and the gas station gas. She can swing by the ATM and get some quick cash. Yet, underlying foundation of our global society is built on sand so this normal is fragile. This normal is vital it is not only a luxury.

    This compression of the economy and the oil sector that appears to be a classic case of demand and supply destruction at some point will be a vicious cycle down with volatility. At some point it could stabilize in a severe depression. We are no longer capable to responding like the last great depression. We have a population 2.5 times higher. High quality resources depleted. This situation is even worse globally in many locations. We are now fully global economically with our food chain exposed globally.

    All locals are exposed even the third world subsistence ones. Many of these subsistence farms are close to unsustainable urban populations that will disperse into and around these farms with a collapse. Mass migrations will disrupt stable areas. I say stable areas many areas will be stable in a depression like situation then add to it a neighboring failed state. That could be a tipping point for these areas.

    No one is sure when this will occur. I feel just the approach of the “dead state” that shorts ETP model describes is all it will take. It is the interaction of critical nodes of the global system that will determine this. The oil complex it one critical element and another is the economy but these are not the only ones. Our leadership nodes are another issue. Our food chain is distinctly vital.

    You can discount and diminish these various storm clouds on the horizon but one cannot argue the sky is darkening. We are even hearing thunder. Abrupt climate change is proving to be closer than many of us thought. This is just another straw on the camel’s back.

    I hope we have 5-10 years left because that is still enough time to plan some more life boats so we can salvage some kind of civilization from this coming descent. If we have a collapse next year much will be lost. A crisis that leads into a long emergency with crisis induced change may allow some mitigation and adaptation that critically adapts us to the worse ahead.

  5. rockman on Sat, 24th Oct 2015 9:34 am 

    FYI from someone who spent several years looking for conventional oil and had hundred of $million available to drill: consistantly found few prospects to drill. And it was’t for a lack of capability: today’s exploration technology is amazingly better then it was a few decades ago. Yes: finding existing oil/NG prospects has never been easiler. Finding those remaining prospects isn’t the problem…it’s the lack of those prospects. And remember this was when oil was $100/bbl. So imagine how it’s going at $50/bbl. The same with NG: 6 years ago the Rockman spent $230 million drilling for conventional NG. And then those prices collapsed. And for more then 2 years the Rockman has not drilled one NG prospect. And still has $250 million CASH to spend.

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